BILL ANALYSIS Ó AB 1371 Page 1 Date of Hearing: May 18, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 1371 Lackey - As Amended April 20, 2015 Majority vote. Tax levy. SUBJECT: Personal income taxes: deduction: education expenses. SUMMARY: Allows an "above-the-line" deduction for the cost of education-related expenses of a taxpayer's dependent child attending public or private school, not to exceed $2,500. Specifically, this bill: 1)Allows an "above-the-line" deduction, beginning on or after January 1, 2016, and before January 1, 2021, for an amount equal to the qualified amount that was paid or incurred for qualified education-related expenses for one or more dependent AB 1371 Page 2 children by a qualified taxpayer during the taxable year. 2)Defines "dependent children" as one or more children that meet all of the following: a) Attended Kindergarten or any Grades 1 through 12 in California at a public, charter, or private school that has a current private school affidavit on file with the State Department of Education in the taxable year; b) Are deemed to be a full-time pupil in accordance with the compulsory education requirements of Education Code Section 48200 and 48222; c) Are under the age of 21 at the end of the school year; d) Meet the requirements of Internal Revenue Code (IRC) Section 152(c)(1)(D) and (E); and, e) Are claimed as dependent children on an original, timely filed return of the qualifying taxpayer. 3)Defines "qualified amount" as the amount paid or incurred for qualified education-related expenses, not to exceed $2,500. 4)Defines "qualified education-related expenses" as the following costs, incurred for Kindergarten or for any Grades 1 through 12: a) Textbooks; AB 1371 Page 3 b) School supplies, which include, but are not limited to, pens, paper, pencils, calculators, and rulers; c) Rental or purchase of educational equipment required for classes during the regular school day; d) School uniforms that are not part of a co-curricular activity; e) Computers, computer hardware, and educational computer software used to learn academic subjects; f) Fees for college courses at public institutions or independent nonprofit colleges, or for summer school courses that satisfy high school graduation requirements; g) Psycho-educational diagnostic evaluations to assess the cognitive and academic abilities of dependent children; h) Special education and related services for dependent children who have an individualized education program or its equivalent; i) Out-of-school enrichment programs, tutoring, and summer programs that are academic in nature; and, j) Public transportation or third-party transportation expenses for traveling directly to and from school. AB 1371 Page 4 5)Provides that "qualified education-related expenses" shall not include any expenses for the items listed under the definition of "qualified education-related expenses" that are used in a trade or business. 6)Defines a "qualified taxpayer" as a parent or legal guardian of one or more depended children who meet all of the following requirements: a) Both dependent children and the parent or guardian reside in California when the qualified education-related expenses are paid or incurred; and, b) The household income does not exceed 250% of the federal Income Eligibility Guidelines published by the Food and Nutrition Service of the United States Department of Agriculture for use in determining eligibility for reduced price meals. "Household income" means adjusted gross income as defined by IRC Section 62. 7)Provides that the deduction may not exceed $2,500 in a taxable year. If more than one qualified taxpayer may be allowed this deduction for dependent children, including a qualified taxpayer filing a joint return, the sum of all deductions allowed under this section for those dependent children shall not exceed $2,500 in a taxable year. 8)Provides that the Franchise Tax Board (FTB) may prescribe rules, guidelines, or procedures necessary or appropriate to carry out the purpose of this bill. 9)Provides that the Administrative Procedure Act (Government AB 1371 Page 5 Code Section 11340 et seq.) shall not apply to any standard, criterion, procedure, determination, rule, notice, or guideline established or issued by the FTB under this bill. 10)Provides that the provisions of this bill shall remain in effect until December 1, 2021, and as of that date is repealed. 11)Provides that it is the intent of the Legislature to make the findings required by Revenue and Taxation Code (R&TC) Section 41. 12)Makes findings and declarations. 13)Takes effect immediately as a tax levy. EXISTING LAW: 1)Allows individuals to deduct certain expenses, such as medical expenses, charitable contributions, interest, and taxes as itemized deductions. Other expenses from the production of income and certain employee business expenses are considered miscellaneous itemized deductions. 2)Allows for an "above-the-line" deduction for certain expenses when calculating adjusted gross income. These expenses include expenses and interest on education loans, certain ordinary and necessary trade and business expenses, losses from the sale or exchange of certain property, contributions for pension, profit-sharing and annuity plans of self-employed individuals, retirement savings, and alimony. Thus, all taxpayers with these types of expenses receive the benefit of the deduction, regardless of whether the taxpayer itemizes AB 1371 Page 6 deductions or uses the standard deduction. 3)Requires any bill authorizing a new PIT credit to contain all of the following: a) Specific goals, purposes, and objectives that the tax credit will achieve; b) Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill; and, c) Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.) FISCAL EFFECT: The FTB estimates that this bill will reduce General Fund revenue by $21 million in fiscal year (FY) 2016-17, $22 million in FY 2017-18, and $22 million in FY 2018-19. COMMENTS: 1)Author's Statemen t. The author has provided the following statement in support of this bill: AB 1371 Page 7 The education tax relief provided under AB 1371 would empower and engage parents to personally care for their own school children's K-12 learning needs - which they know most intimately. AB 1371 would benefit California's school children, but it giving vital support to low-income, working- and middle-class families. Such tax relief for citizens who shoulder an extra weight in pursuit of our common good has long been considered sound public policy. In 1983, the U.S. Supreme Court ruled that such education tax relief programs are constitutional. AB 1371 would allow families with incomes of 250 percent above the Reduced Price Lunch Program guidelines or less to take a $2,500 above-the-line deduction from their gross income for K-12 educational expenses. For example, a family of four that brings in $110,000 per year or less would be eligible for this deduction. Educational expenses would include tutoring, computer hardware and educational software, diagnostic evaluations, special education services, academic after-school programs, textbooks and school supplies, uniforms, and transportation. 2)Arguments in Opposition : the American Federation of State, County and Municipal Employees states that "[e]ducation is one of AFSCME's paramount concerns. With that being said, AFSCME opposes AB 1371 because though it is a noble attempt to aid low-income families, it falls dramatically short of truly fulfilling its purpose." 3)Proposition 30 . In general, Proposition 30 increased the marginal tax rate for those making above $250,000 and increased the statewide sales tax rate from 7.25% to 7.5%. Proposition 30 was estimated to increase General Fund revenue AB 1371 Page 8 by about $6 billion per year, which would primarily be used to restore funding to California's public school system. The provisions of this bill are meant to counteract the lack of funding once available to K-12 education. Specifically, this bill seeks to remedy the fact that many schools are unable to provide school supplies and books. However, as noted in the Governor's Budget Summary, the budget for FY 2014-15 provides $61.6 billion in Proposition 98 funding, an increase of $6.3 billion over the 2013 budget act level. It appears that new revenues, provided in part because of the passage of Proposition 30, have translated into additional funding for K through 12. 4)Is This Bill Needed ? The California Supreme Court ruled in Hartzell v. Connell (1984) 35 Cal.3d 899, 201) that pupil fees violate the constitutional right to a free education. Specifically, the court ruled that extracurricular activities also must be free because they are an integral component of public education and a part of the educational program. In September 2010, the American Civil Liberties Union (ACLU) filed a class action lawsuit alleging the unconstitutional assessment of pupil fees by school districts [Jane Doe, et al. v. State of California, et al., (Super. Ct. Los Angeles County, 2010, BC445151)]. The lawsuit was brought forward because ACLU reports showed that more than 50 public school districts required pupils to pay fees for textbooks, workbooks, science labs, physical education uniforms, classroom materials, and extracurricular activities. Instead of moving forward with the lawsuit, the ACLU and interested parties sought a legislative solution. As a result, AB 1575 (Lara), Chapter 776, Statutes of 2012, which was sponsored by ACLU, codified the long held constitutional prohibition on the imposition of pupil fees and established procedures to ensure compliance with the prohibition. Since the passage of AB 1575, many schools have stopped imposing fees for participation and, in some cases, are paying for items that were traditionally paid for by pupils and AB 1371 Page 9 parents. Most recently, school districts have informed parents that caps and gowns will be provided free of charge. Within the last year, parents throughout California have been utilizing compliance procedures to challenge school districts that require families to pay for Advanced Placement exams, classrooms supplies, workbooks, and school uniforms. (Loretta Kalb, California to Schools: Student don't have to pay for graduation attire, other items 'integral' to education, Sacramento Bee, May 7, 2014.) In some cases, parents and activists are even challenging "supply lists" posted by school for returning student. One parent, in the San Juan School District, received a letter outlining a list of supplies that children would need at the beginning of the year. The list included items such as tissue paper, binders, pencils and pens. The supplies cost parents between $70 and $100. In response to the challenge to required supplies, the school notified parents that all necessary materials will be provided to school children and that "supply lists" are suggestions, not required for full participation. Schools across California have begun making similar changes to "required" items and fees that are imposed on pupils. In most cases, schools have stated that items will be provided free of charge. 5)Private School Subsidy . The "above-the-line" deduction for education-related expenses applies to both private and public schools. Education-related expenses include computers, computer hardware, out-of-school enrichment programs, and third-party transportation to expenses for traveling directly to and from school. The Committee may wish consider whether subsidizing private educational courses and private transportation is an appropriate use of public funds. 6)Performance Measurement Standards : Existing law requires any bill, introduced on or after January 1, 2015, that would authorize a new credit under either the PIT Law or the CT Law to provide performance measurement standards. According to AB 1371 Page 10 legislative findings and declarations, tax preferences represent a major exercise of government power, but face less oversight than the spending side of the budget. As a way of ensuring transparency and accountability when investing public dollars through tax credit programs, the Legislature decided to apply performance measurement standards as a way of reviewing tax credits with the same level of scrutiny as spending programs. This bill states that legislative intent to make the findings required by RT&C Section 41. However, this bill provides an above-the-line deduction, not a tax credit. Therefore, the performance measurement requirements established under R&TC Section 41 do not apply. 7)The Administrative Procedure Act : This bill provides that the Administrative Procedure Act shall not apply to any rule, notice, or guideline established by the FTB pursuant to this bill. It is not clear to Committee staff why an exemption from the Administrative Procedure Act is necessary in this instance. 8)Previous Legislation : AB 1786 (Olsen), of the 2013-14 Legislative Session, would have allowed an "above-the-line" deduction for the cost of education-related expenses of the taxpayer's dependent child attending public or private school, not to exceed $2,500. AB 1786 was held on this Committee's Suspense File. REGISTERED SUPPORT / OPPOSITION: Support None on file AB 1371 Page 11 Opposition American Federation of State, County and Municipal Employees California Tax Reform Association Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916) 319-2098